Opinion
Cause No. IP01-0022-C-H/G
August 7, 2001
ENTRY ON PENDING MOTIONS
Plaintiff Conseco Equity Sales, Inc. (CES) has sued to block arbitration of age discrimination and breach of contract claims filed by defendants Paul Clemens, Theodore Rausch, Michael Moore, Keith Reiter, and Gregory Yarnell in a National Association of Securities Dealers (NASD) arbitration proceeding. The defendants originally sought to arbitrate their claims against CES and several related entities: Conseco, Inc., Conseco Capital Management, Inc., Conseco Services, L.L.C., Conseco Fund Group, and Conseco Marketing (referred to jointly, along with CES, as the "Conseco Plaintiffs"). A panel of NASD arbitrators ordered all of the Conseco Plaintiffs to participate in arbitration.
The Conseco Plaintiffs have moved for a preliminary injunction to stop the arbitration. Since the commencement of this action, defendants have agreed to drop their arbitration claims against all of the Conseco Plaintiffs except CES. In addition, defendants have moved to have this action either dismissed or transferred to the Northern District of Texas where the defendants have sued all of the Conseco Plaintiffs except CES. The court heard argument on the pending motions on February 26, 2001. The parties presented evidence and additional argument at a supplemental hearing on June 7, 2001.
For the reasons explained below, the court denies plaintiffs' motion for preliminary injunction, denies defendants' motion to dismiss, and denies defendants' motion for transfer. The arbitrability of defendants' claims against CES is an issue for the court to decide. Under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., the relevant arbitration agreements, and NASD rules, defendants' claims against CES are arbitrable. CES has raised issues that go to the merits of the claims, not to their arbitrability. This entry sets forth the court's findings of fact and conclusions of law pursuant to Rules 52 and 65 of the Federal Rules of Civil Procedure.
Factual Background
Defendants Paul Clemens, Michael Moore, Theodore Rausch, Keith Reiter, and Gregory Yarnell are claimants in an NASD arbitration originally filed against all the Conseco Plaintiffs. Defendants allege that they were terminated from their positions as regional sales directors in violation of the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 621 et seq., and in breach of their employment contracts. See First Amended Statement of Claim. As regional sales directors, defendants promoted the Conseco Fund Group family of mutual funds to companies like Merrill Lynch and other retailers that in turn sell mutual funds to the public.
The Conseco Plaintiffs are several related entities in the financial services industry. Conseco, Inc. is the parent corporation of Conseco Capital Management, Inc., Conseco Services, L.L.C., and CES. During the defendants' employment, the Conseco family of companies assigned defendants at various times to Conseco Capital Management and Conseco Services for budgetary purposes. Conseco Capital Management and Conseco Services both have issued paychecks to the defendants. Conseco Marketing is a former department of Conseco Services but was never an independent legal entity. Conseco Fund Group is a Massachusetts business trust that issues and administers several mutual funds.
CES is a wholesale securities broker-dealer and a member of the NASD. CES distributes Conseco Fund Group mutual funds. Conseco Management serves as the financial adviser to the Conseco Fund Group. Conseco Services is the administrator of the Conseco Fund Group.
Because of their job duties in the financial services industry, defendants were required to obtain and maintain licensure through the NASD and to register with the NASD through an NASD-member firm such as CES. Defendants Clemens and Rausch registered through CES shortly before their terminations.
The registration form, known as the U-4 form, contained the following arbitration clause:
5. I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of [the NASD] as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.
Ex. B, Conseco Evid. Submission.
Defendants Moore, Reiter, and Yarnell were supposed to register with CES but that was never accomplished. Reiter and Moore were registered with Conseco Financial Services when they were discharged. There is no evidence that Yarnell was registered with any Conseco entity.
Defendants filed their arbitration claims with the NASD in October 1999. The Conseco Plaintiffs, the respondents in the arbitration proceeding, moved to dismiss the defendants' claims. They argued that CES was not the defendants' employer and that the other Conseco Plaintiffs were not subject to arbitration because they were not NASD members.
The arbitration panel conducted a hearing on the Conseco Plaintiffs' motion in Indianapolis in November 2000. On December 1, 2000, the arbitrators ordered all of the Conseco Plaintiffs to participate in arbitration. Ex. H.
During the course of the litigation in this court, the defendants have agreed to pursue arbitration claims against CES only and have withdrawn all arbitration claims against the other Conseco Plaintiffs. Def. Notice of Stipulation. Defendants assert that they entered into the stipulation with the Conseco Plaintiffs because of CES's representation that it would consent to arbitrate the defendants' claims if the court found that CES employed the defendants. See Def. Br. Concerning Arbitrability Standard at 3.
The defendants also are pursuing claims against all of the Conseco Plaintiffs except CES in federal court in the Northern District of Texas. That action has been stayed in its early stages.
Subject Matter Jurisdiction Defendants have moved to dismiss the Conseco Plaintiffs' action on the ground that the court lacks subject matter jurisdiction. It is well established that the Federal Arbitration Act (FAA) does not create any independent basis for federal question jurisdiction under 28 U.S.C. § 1331. Minor v. Prudential Securities, Inc., 94 F.3d 1103, 1104-05 (7th Cir. 1996) (holding that action under § 10 of FAA to vacate arbitration award requires independent basis for jurisdiction).
In this case, diversity jurisdiction under 28 U.S.C. § 1332 is not available.
Plaintiff CES and defendant Clemens are both alleged to be citizens of Texas, so complete diversity is not present.
The complaint actually alleges, and the answer admits, that Clemens is a resident of Texas, not a citizen. Citizenship is the proper inquiry under § 1332, but nothing in the papers suggests that Clemens could be deemed a citizen of any state other than Texas notwithstanding his residence there.
The Conseco Plaintiffs rely on federal question jurisdiction. The Conseco Plaintiffs have framed this case as a "reverse § 4" action. Section 4 of the FAA authorizes actions to compel arbitration before any district court "which, save for such agreement [to arbitrate], would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties." 9 U.S.C. § 4.
Courts of Appeals of other circuits have held that this language in § 4 does not authorize jurisdiction based solely on the theory that the underlying claim to be arbitrated would arise under federal law. See Westmoreland Capital Corp. v. Findlay, 100 F.3d 263, 267-69 (2d Cir. 1996) (affirming dismissal of petition to stay NASD arbitration of securities fraud claims for lack of subject matter jurisdiction where petition did not allege adequate independent basis for federal question or diversity jurisdiction); Prudential-Bache Securities, Inc. v. Fitch, 966 F.2d 981, 986-88 (5th Cir. 1992).
These courts have reasoned that the language in § 4 was addressed to an ancient doctrine of the common law that had been used to preclude arbitration, and that Congress did not intend to create a new font of federal question jurisdiction based on the nature of a case that has not actually been filed. See, e.g., Westmoreland Capital Corp., 100 F.3d at 267-69. The Seventh Circuit appears not to have decided the issue. See Minor, 94 F.3d at 1106 (citing Fitch and other cases but not deciding question); cf. Amgen, Inc. v. Kidney Center of Delaware County, Ltd., 95 F.3d 562, 567 (7th Cir. 1996) (decided two days after Minor, remanding for jurisdictional findings, and stating in dicta without citation: "When a party to an arbitration initiates an independent proceeding, it must establish that the dispute that underlies the arbitration would come within the jurisdiction of the district court."), dismissed after remand, 101 F.3d 110 (7th Cir. 1996) (table).
On this issue, this court agrees with the Second and Fifth Circuits, meaning that this court does not have an independent basis for jurisdiction over the Conseco Plaintiffs' claims for declaratory and injunctive relief.
The defendants in this case have asserted their substantive claims against CES as counterclaims in this case. These counterclaims include claims under the Age Discrimination in Employment Act that would fall within this court's subject matter jurisdiction if they were asserted independently. Under these circumstances, where there is an independent basis for exercising jurisdiction over counterclaims that have actually been pled, the court retains jurisdiction over the action. See Isenberg v. Biddle, 125 F.2d 741, 743 (D.C. Cir. 1941) (although district court lacked jurisdiction over plaintiff's claim, it could exercise jurisdiction over counterclaim that had independent basis for jurisdiction), followed in Switzer Bros., Inc. v. Chicago Cardboard Co., 252 F.2d 407, 410 (7th Cir. 1958) (same); accord, Pioche Mines Consolidated, Inc. v. Fidelity-Philadelphia Trust Co., 206 F.2d 336, 336-37 (9th Cir. 1953) (reversing dismissal of counterclaim; although district court lacked jurisdiction over plaintiff's claim, diversity provided independent basis for jurisdiction over counterclaim); Amoco Production Co. v. United States, 852 F.2d 1574, 1579 (10th Cir. 1988); Niagara Mohawk Power Corp. v. Tonawanda Band of Seneca Indians, 94 F.3d 747, 753 (2d Cir. 1996).
The court construes defendants' answer and counterclaim as both (a) asserting the underlying claims for age discrimination in employment and for breach of contract, and (b) seeking an order compelling CES to go forward with the arbitration. See Answer-Counterclaim ¶ 3 ("Counter-Plaintiffs prefer arbitration, which may be mandatory in this case"). Accordingly, the court finds that it has subject matter jurisdiction over this action, including the Conseco Plaintiffs' claim for declaratory relief and their motion for a preliminary injunction.
If the court has not construed the counterclaims correctly, then this court 2 would be required to dismiss this entire action for lack of subject matter jurisdiction for the reasons set forth above.
CES's Motion for Preliminary Injunction
To obtain the equitable relief of a preliminary injunction, a party must show a reasonable likelihood of success on the merits of a claim, and the threat of imminent and irreparable harm for which there is no adequate remedy at law. If the moving party makes that showing, the court must then consider the balance of harms, which requires consideration of the consequences of both erroneously granting preliminary relief and erroneously denying such relief, as well as the public interest, including the interests of those not parties to the lawsuit. E.g., Abbott Laboratories v. Mead Johnson Co., 971 F.2d 6, 11-12 (7th Cir. 1992). Here the analysis can stop with the likelihood of success on the merits because CES has not shown a reasonable likelihood of prevailing on its claim that arbitration is prohibited. In addition, requiring arbitration will not inflict irreparable harm on CES. See PaineWebber, Inc., v. Farnam, 843 F.2d 1050, 1051 (7th Cir. 1988) (long settled that the ordinary incidents of arbitrating a case are not irreparable injury); Graphic Communications Union v. Chicago Tribune Co., 779 F.2d 13, 15-16 (7th Cir. 1985) (same; cases warranting a stay pending appeal "will be extraordinarily rare"); see also 9 U.S.C. § 16 (in general, court orders directing arbitration to proceed are not immediately appealable, implying that arbitration does not inflict irreparable injury).In evaluating the likelihood of success on the merits, the court considers first whether arbitrability should be decided by the court or by the arbitrators.
The court then considers defendants' argument that CES has consented to the arbitration, and turns finally to the core questions of arbitrability.
I. The Court Decides Arbitrability
The parties' arbitration agreement determines who will decide whether a dispute is arbitrable. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995); Miller, 139 F.3d at 1133. If the parties agreed to submit the question of arbitrability to arbitration, then the arbitrators have the primary power to decide whether the dispute is arbitrable. Such a decision, like other arbitration decisions on the merits, is then subject to deferential judicial review. See First Options, 514 U.S. at 943. If the parties did not agree to submit the arbitrability issue to arbitration, however, the court decides arbitrability "independently," or de novo, in the language of judicial review. See id.; accord, Sphere Drake Ins. Ltd. v. All American Ins. Co., ___ F.3d ___, ___, 2001 WL 747862, at *3 (7th Cir. July 3, 2001).
When deciding whether the parties agreed to submit arbitrability to arbitration, courts should not conclude the parties agreed to arbitrate the issue of arbitrability unless there is "clear and unmistakable" evidence of their intent. First Options, 514 U.S. at 944. If the parties' arbitration agreement is silent or ambiguous on that question, the presumption is that the parties did not intend to submit that question to the arbitrators. Id. at 944-45.
The arbitration clauses in Clemens' and Rausch's U-4 forms are silent on the issue of whether the question of arbitrability is subject to arbitration. Although the clauses are broadly worded, see Ex. B (agreeing to arbitrate "any dispute" that is "required" to be arbitrated under NASD rules), this language does not constitute "clear and unmistakable" evidence of the parties' intent to arbitrate arbitrability itself. Further, the Seventh Circuit has held that the NASD rules themselves do not require the parties to arbitrate arbitrability. See Miller, 139 F.3d at 1133-34 (NASD Rules 10101, 10301(a) and 10324 do not confer on arbitrators the right to decide arbitrability); Edward D. Jones Co. v. Sorrells, 957 F.2d 509, 514 n. 6 (7th Cir. 1992) (former version of NASD Rule 10324 was not clear expression of intent to have arbitrators decide arbitrability).
Accordingly, the court reviews the arbitrability of Clemens' and Rausch's claims against CES independently, based on the total record before it. Moore, Reiter, and Yarnell did not register with CES, but they rely on CES's membership in the NASD to establish CES's agreement to arbitrate. For the same reasons that apply to Clemens and Rausch, there is no clear and unmistakable evidence that CES agreed to submit arbitrability to arbitration. Thus, as with Clemens' and Rausch's claims, the presumption against arbitrating arbitrability stands. The court decides de novo the arbitrability of Moore's, Reiter's, and Yarnell's claims.
In an effort to avoid de novo consideration of the issue, defendants argue that, because the arbitrators have already decided the claims are arbitrable, anything other than deferential review of that decision would amount to an impermissible interlocutory appeal of an arbitration decision.
Defendants' argument is contrary to the plain teachings of First Options where, among other points, the Supreme Court rejected an argument that the timing of the court challenge to arbitrability should affect how the issue is resolved. See First Options, 514 U.S. at 946 (the fact that the parties resisting arbitration first argued the arbitrability issues to the arbitrators "simply does not say anything about whether [they] intended to be bound by the arbitrators' decision"). In addition, in contrast to CES's present action, the cases defendants have cited involved premature court challenges related to the merits of the disputes under arbitration, not to whether the disputes were arbitrable at all. See, e.g., Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 413-15 (2d Cir. 1980) (district court lacked jurisdiction to review interim arbitration award).
II. Defendants' Claims Against CES Are Arbitrable
The Federal Arbitration Act provides that an arbitration clause in a "contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999), quoting 9 U.S.C. § 2. Whether a particular issue is subject to arbitration under the arbitration clause is a matter of contract interpretation. A party cannot be required to submit to arbitration any dispute which it has not agreed to submit. See id., citing United Steelworkers of America v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960).
Nevertheless, a strong federal policy favors arbitration, so any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Kiefer, 174 F.3d at 909; see also Miller, 139 F.3d at 1136 ("[O]nce it is clear that the parties have a contract that provides for arbitration of some issues between them, any doubts concerning the scope of the arbitration clause are resolved in favor of arbitration."). A court may not deny a party's request to arbitrate an issue "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Kiefer, 174 F.3d at 907, quoting United Steel Workers of America, 363 U.S. at 582-83.
A. Consent to Arbitration
As a threshold matter, the defendants argue that CES consented to arbitrate their claims after defendants commenced the arbitration proceeding. Defendants rely on the NASD Uniform Submission Agreement form and on statements that CES made through its counsel.
The submission agreement formally submits a claim to the NASD and states that the parties agree to abide by and perform any award rendered pursuant to the agreement. The record before the court does not contain copies of the submission agreements signed by CES, but CES has not denied that such agreements were filed with the NASD.
In addition, before CES filed this action, it made some unqualified statements about its willingness to arbitrate the defendants' claims. In its response to defendants' arbitration claim, CES wrote: "Conseco Equity Sales is the only entity required to arbitrate this dispute, and it is the only entity that consents to arbitration." Conseco Equity Sales, Inc.'s Response to Claimants' First Amended Statement of Claim; see also Br. in Supp. of Respondent's Motion to Dismiss (NASD filing) ("The arbitration should be dismissed because the only named respondent who has consented to arbitration, Conseco Equity Sales, Inc., . . . .). In addition, at the arbitration hearing, CES's counsel reiterated this statement when she introduced herself and said: "I'm here on behalf of Conseco Equity Sales, Inc., which is the only party that's conceded or consented to arbitration in this action." Arb. Tr. at 10; see also id. at 18 ("Conseco Equity Sales is a member of the NASD, and therefore, is the only member that has agreed or the only entity that has agreed to arbitration under the code and has consented to arbitration in this matter.").
Later during the arbitration hearing, defendants' counsel asked CES to clarify its position on the arbitrability of claims brought by the three defendants who did not register with CES (Moore, Reiter, and Yarnell). CES's counsel stated: "I don't know. I guess I have to think about that. . . . I would tell you that to the extent they're hanging their hat on registrations, these three guys weren't registered with Conseco Equity Sales. So I'm not making that concession on the record. I'll sort that out afterwards, if that's all right." Arb. Tr. at 150-51.
In this action, CES asserts that it could be found to have agreed to arbitration only if it were found to have employed the defendants Clemens and Rausch. But cf. Brief in Supp. Motion for Preliminary Injunction at 3 ("Conseco Equity Sales, Inc. consented to arbitration as it was obligated to do."). CES also now contends that it has not consented to arbitrate any claims brought by Moore, Reiter, and Yarnell, the three defendants who never registered with the NASD through CES.
The court need not decide whether CES should be estopped from disputing the arbitrability of the defendants' claims by virtue of its several statements about consenting to arbitration. As discussed below, CES consented to arbitration of all defendants' claims through its membership in the NASD. The court considers Clemens and Rausch first and then turns to the other defendants.
B. Clemens and Rausch
Under the arbitration clause in Clemens' and Rausch's U-4 forms, they agreed to arbitrate "any dispute that may arise out of" their relationship with CES that is required to be arbitrated under the NASD rules. By its own membership in the NASD, CES also agreed to arbitrate such disputes. Under the heading "Required Submission," NASD Rule 10201(a) and (b) provide:
(a) Except as provided in paragraph (b), a dispute, claim, or controversy under the Rule 10100 Series between or among members and/or associated persons, and/or certain others, arising in connection with the business or such member(s) or in connection with the activities of such associated person(s), or arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:
(1) a member against another member;
(2) a member against a person associated with a member or a person associated with a member against a member; and (3) a person associated with a member against a person associated with a member.
(b) A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose.
Subsection (b) provides an exception to the required submissions rule for claims alleging employment discrimination, but CES has not invoked that exception.
Under Rule 10201, determining whether CES must arbitrate Clemens' and Rausch's claims requires a three-part inquiry: (1) whether these are disputes "arising out of and in connection with" each defendant's relationship with CES; (2) whether the disputes are between an NASD member and an associated person; and (3) whether the defendants are entitled to insist that CES arbitrate their claims. The answer to each question is yes, so CES must arbitrate the claims.
(1) Clemens' and Rausch's claims arise out of and in connection with their relationships with CES. Clemens and Rausch were registered with the NASD through CES so that they would have the legal right to work in the financial services industry. In the course of their employment, Clemens and Rausch marketed the Conseco Fund Group mutual fund products that CES distributed to retailers like Merrill Lynch. CES contends it had no employees of its own; under that theory, CES was dependent on individuals like Clemens and Rausch to conduct its business. CES could not accomplish its mission without Clemens and Rausch, and Clemens and Rausch could not perform their jobs without CES.
The centrality of Clemens' and Rausch's relationship with CES to their work in the Conseco family of companies is shown by documents that further demonstrate that relationship. CES's name appeared on Clemens' and Rausch's business cards. Clemens' offer letter welcomed him to the "Conseco Fund Group/Conseco Equity Sales, Inc. team." Clemens and Rausch appeared on Conseco's internal organization charts under the heading "Conseco Fund Group Conseco Equity Sales."
Regardless of whether CES was the Conseco entity that actually employed Clemens and Rausch, these documents and the testimony from the arbitration hearing show that Clemens and Rausch worked closely with CES. The fact that CES's name was required to appear on these documents under NASD regulations does not diminish this reality. In the terms used in the U-4 form and NASD Rule 10201(a), the disputes about Clemens' and Rausch's employment and termination have arisen in connection with the business of CES.
(2) Clemens and Rausch are "associated persons" seeking to arbitrate claims against an NASD member, CES. According to NASD by-laws, a "person associated with a member" includes an "officer, director, or branch manager of a member; or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD." NASD Bylaws, Art. I (ee)(2).
Clemens and Rausch fall within this definition. Clemens and Rausch first held officer titles, regional vice president, and later became regional sales directors. They were also engaged in the securities business and were directly or indirectly controlled by CES. Accordingly, their disputes with CES are covered by the arbitration rule.
(3) Further, Clemens and Rausch are entitled to demand arbitration of their claims. In the language of NASD Rule 10201(a)(2), their claims "shall be arbitrated under this Code, at the instance of . . . a person associated with a member against a member."
In its effort to block arbitration, CES has tried to make the issue whether CES was the employer of Clemens and Rausch. Both sides have addressed at length the issue of how a federal court should interpret the term "employment" as used by the NASD. The court concludes, however, that employment status does not control the issue of arbitrability, and the court need not decide it.
Although an employment dispute with an NASD member may be arbitrable under NASD rules and the terms of the U-4 form, the arbitration provisions simply are not limited to employment disputes. NASD Rule 10201 requires arbitration of a claim by an "associated person" against an NASD member for claims "arising in connection with the business of such member(s) or in connection with the activities of such associated person(s) . . . ." Because Clemens' and Rausch's claims are required submissions under the "arising in connection with the business of such member" language of NASD Rule 10201, the court can decide that their claims are arbitrable without deciding whether CES employed Clemens and Rausch.
CES relies on a line of cases in which employers which were not NASD members themselves, but which were affiliated with NASD members, tried to compel arbitration of employment disputes on the theory that the employers were persons "associated" with NASD members. The courts have rejected such efforts. See Paul Revere Variable Annuity Ins. Co. v. Kirschhofer, 226 F.3d 15, 21-22 (1st Cir. 2000); Burns v. New York Life Ins. Co., 202 F.3d 616, 620-22 (2d Cir. 2000); Gardner v. Benefits Communications Corp., 175 F.3d 155, 162 (D.C. Cir. 1999); Tays v. Covenant Life Ins. Co., 964 F.2d 501, 502-03 (5th Cir. 1992).
Those cases do not support CES's position. The courts in those cases interpreted the definition of an "associated person" in the NASD rules and held that only natural persons (not affiliated corporations or other business entities) may be "associated persons."
Those holdings and the supporting reasoning do not apply to this case. The individual defendants in this case plainly fall within the definition of "associated person," and they seek to arbitrate claims against an NASD member arising in connection with the business of the member and in connection with their own activities.
The question of which of the Conseco entities employed the defendants ultimately goes to the merits of the defendants' claims under the ADEA (and perhaps also under their breach of contract theory). In employment discrimination cases in court, whether the defendant employed the plaintiff and whether the defendant otherwise qualifies as an "employer" under the applicable statute are questions that go to the merits of the case, not to the court's jurisdiction. See, e.g., Papa v. Katy Industries, Inc., 166 F.3d 937, 943 (7th Cir. 1999) (status as covered "employer" under Title VII, ADA, and ADEA not jurisdictional); E.E.O.C. v. The Chicago Club, 86 F.3d 1423, 1428 (7th Cir. 1996) (not jurisdictional under Title VII). The merits of the claims, including the issue of employment status, are for the arbitrators to decide.
At the hearing on June 7, 2001, counsel for CES also argued that defendants could not rely on the language calling for arbitration of claims "arising in connection with" a member's business because it was not sufficiently specific to apply to claims of employment discrimination. Counsel alluded generally to a series of cases litigated some years ago, before the NASD amended its arbitration rules to refer specifically to employment disputes. In most of those cases, employees were trying to avoid arbitration of their employment discrimination claims, while employers tried to argue that arbitration was required.
In the Seventh Circuit, the key case was Farrand v. Lutheran Brotherhood, 993 F.2d 1253 (7th Cir. 1993), which held that the NASD rules did not require arbitration
of an age discrimination claim. The Farrand court interpreted an NASD rule that required arbitration of any dispute, claim or controversy arising out of or in connection with the business of any member of the Association, with the exception of disputes involving the insurance business of any member which is also an insurance company:
(1) between or among members;
(2) between or among members and public customers, or others; and
(3) between or among members, registered clearing agencies with which the Association has entered into an agreement to utilize the Association's arbitration facilities and procedures, and participants, pledgees or other persons using the facilities of a registered clearing agency, as these terms are defined under the rules of such a registered clearing agency.993 F.2d at 1254, quoting NASD Code of Arbitration Procedure § 1.
The employer in Farrand had argued that the language "arising out of or in connection with the business of any member" was broad enough to include employment discrimination claims. The court responded: "That would be an appropriate reading if the rule stopped at the colon. But it continues with language that the Brotherhood does not mention. The text following the colon establishes which matters are arbitrable." Id. The employer in Farrand could not show that the dispute was one between NASD members, between or among members and public customers or others, or between members and registered clearing agencies and other appropriate persons. That was the basis for the Seventh Circuit's decision.
The court also construed narrowly the reference in subsection (2) to "others" so as not to reach disputes between a member and an employee. See 993 F.2d at 1254-55.
In NASD Rule 10201, which applies to this case, the arbitration provision applies the broad phrase "arising in connection with the business of such member" to disputes between an NASD member (like CES) and "associated persons," like the defendants in this case. Accordingly, this court's interpretation of the applicable version of the NASD rules is consistent with Farrand. See 993 F.2d at 1254 ("That would be an appropriate reading if the rule stopped at the colon."). Clemens' and Rausch's claims against CES are arbitrable.
C. Moore, Reiter, and Yarnell
Moore, Reiter, and Yarnell did not sign arbitration agreements with CES. No U-4 forms listing CES as their firm was ever filed with the NASD. However, that fact does not foreclose the arbitrability of their claims against CES. NASD rules provide an independent basis for the arbitration of claims between associated persons and members.
As an NASD member, CES is bound to arbitrate "required submissions" under NASD Rule 10201. See Rule 10100 (IM-10100) ("It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2110 for a member or a person associated with a member to: (a) fail to submit a dispute for arbitration under the NASD Code of Arbitration Procedure as required by that Code"); see also NASD Rule 10101 ("This Code of Arbitration Procedure is prescribed and adopted . . . for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association . . . . between or among members and associated persons.").
Even without a U-4 form or another arbitration agreement, therefore, CES is required to arbitrate Moore's, Reiter's, and Yarnell's claims if such arbitration is required by NASD Rule 10201. The Third Circuit has explained:
Indeed, even in the absence of such [an arbitration agreement], it has long been established (see, e.g., Axelrod Co. v. Kordich, Victor Neufeld, 451 F.2d 838 (2d Cir. 1971)) that, with NASD being a self-regulating organization within the terms of the Securities Exchange Act of 1934 . . ., each of its members such as First Liberty is contractually bound by its regulations — including all of its arbitration provisions.
First Liberty Investment Group v. Nicholsberg, 145 F.3d 647, 650 (3d Cir. 1998).
The Third Circuit also explained in First Liberty that a U-4 form is not 4 actually a contract between the NASD member and the person who signs it, but between the NASD and the person who signs it. 145 F.3d at 649-50. In other words, whether these defendants registered through CES or not, they are entitled to hold CES to the terms of its NASD membership, which requires submitting a broad range of disputes to arbitration when a proper demand is made.
That is, CES agreed, by virtue of its membership agreement with the NASD, to arbitrate disputes in accord with NASD rules. Thus, even without signed U-4 forms from Moore, Reiter, and Yarnell, their claims are arbitrable if their claims arise in connection with their relationships with CES and if they are "associated persons." The court finds that Moore's, Reiter's, and Yarnell's claims arise in connection with their relationship with CES for the same reasons that Clemens' and Rausch's do. Except for the fact that Moore, Reiter, and Yarnell did not register with the NASD through CES, the arbitration hearing record contains similar evidence about each of the defendants' actual business relationships with CES.
The evidence shows that Moore, Reiter, and Yarnell are persons associated with CES for the same reasons that Clemens and Rausch are. The NASD's definition of "person associated with a member" focuses on that a person's role in relationship to a member, not on whether the person is registered with the NASD through the member with which the person is associated. Thus, even if Yarnell was not registered with NASD through any Conseco entity, the evidence nevertheless indicates he was an "associated person" with CES, and his claims arose in connection with CES's business. These defendants are also entitled to demand arbitration under NASD Rule 10201 because they are persons associated with a member demanding arbitration of covered claims against an NASD member.
Accordingly, CES is unlikely to prevail on the merits of its contention that the defendants' claims against it are not arbitrable. The preliminary injunctive relief CES seeks is not warranted, and its motion for preliminary injunction is hereby denied.
The motion for preliminary injunction is denied as moot with respect to 5 the other Conseco entities, for defendants no longer seek to arbitrate with them.
Defendants' Motion to Transfer
The court denies defendants' motion to transfer this action to the Northern District of Texas. Defendants did not demonstrate that a transfer is necessary to serve the convenience of the parties or witnesses, or the interest of justice. The fact that defendants participated in a two-day arbitration hearing in Indianapolis belies their assertion that this district is unduly inconvenient. Defendants also have not shown why justice would require transferring this action to Texas. The nature of the parties' dispute is not such that one district or the other is better suited to resolve it.Defendants' Motion to Dismiss
Defendants have also moved to dismiss the Conseco Plaintiffs' claims for declaratory and injunctive relief. The court has already addressed the issue of subject matter jurisdiction. To the extent that defendants have raised other issues in their motion, its procedural posture is not clear. Defendants have answered the complaint, so the motion may not be treated as a motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim. Treated as a motion for judgment on the pleadings under Rule 12(c), the motion may not be granted because factual matters (such as evidence regarding the parties' business relationships) are material to the issue. Defendants also have not properly moved for summary judgment with the procedures this court requires for clear presentation of factual and legal issues. See S.D. Ind. Local Rule 56.1. Accordingly, defendants' motion to dismiss this action is hereby denied.
Conclusion
After fully hearing the parties' evidence on the Conseco Plaintiffs' motion for preliminary injunction, the court finds pursuant to Rule 52 that they cannot show a reasonable likelihood of success on the merits of their claim for injunctive relief. The court makes no finding as to which of the Conseco Plaintiffs employed the defendants. This question is left to the arbitrators. Plaintiffs' motion for a preliminary injunction is denied. Defendants' motion to dismiss is denied. Defendants' motion for transfer is denied.
So ordered.